Despite high market expectations that the Federal Reserve is preparing to hike US interest rates one more time before 2018, the Pound Dollar exchange rate has been climbing since Monday and could continue to climb unless UK political uncertainties worsen again.
GBP USD began the week near a one-month-low of 1.3032, but has since climbed to nearer the level of 1.32.
Pound (GBP) Climbs on Market Hopes for Bank of England (BoE) Tightening
The Pound outlook remains limited due to Britain’s persistent political uncertainties involving Brexit and in-fighting amongst the Conservative Party.
However, markets are becoming more optimistic again about Britain’s economic outlook and the chances of a November UK interest rate hike from the Bank of England (BoE) this week too.
On Monday, it emerged that the Office for National Statistics (ONS) had published an erroneous statistic on UK labour costs.
The ONS had published that unit labour costs had grown by 1.6% in the three months to June, but clarified on Monday that the correct figure was 2.4%.
According to many analysts, this figure indicated that UK wages were seeing stronger momentum than expected and could support the case for higher UK interest rates within the short to medium-term.
Howard Archer, chief economic adviser at the EY Item Club, stated;
‘The upward revision may make it modestly easier for the MPC to press ahead with an interest rate hike in November, which they seem pretty determined to do’
Rising speculation that the BoE could hike UK rates as soon as November has supported the Pound.
Investors are also more optimistic about the lasting leadership of UK Prime Minister Theresa May this week, after mutterings that she was willing to reshuffle her government cabinet in order to quell possible leadership challenges and even diminish the power of ‘hard Brexit’ advocates.
Still, political concerns remain a big concern for Pound traders and the Pound outlook.
Any indication that May could still face a leadership challenge would cause further Pound weakness.
The Pound outlook would also worsen if the EU indicates that it is still not satisfied with Britain’s side of UK-EU Brexit negotiations.
On the other hand, if Brexit negotiations have advanced to the point where trade talks look more likely, the Pound outlook will improve and Sterling will advance.
US Dollar (USD) Slips from Highs but Outlook Still Higher
In recent weeks, the US Dollar has strengthened thanks to improving US ecostats and optimistic commentary from Federal Reserve officials.
The news has bolstered market hopes that the US economy will be able to support a third 2017 interest rate hike from the Federal Reserve.
December Fed rate hike bets have remained above 85% in recent sessions, as US wage growth improved in the latest Non-Farm Payroll report.
The US Dollar has also benefitted from hopes that US President Donald Trump’s tax reform plans could successfully pass through Congress in some areas.
Overall, markets are more optimistic about the US Dollar outlook than they were a month ago.
The ‘Greenback’ was sold from its highs against the Pound this week as Sterling recovered and US Dollar traders awaited further signals from the Federal Reserve.
However, depending on the contents of the latest Federal Open Market Committee (FOMC) minutes report, GBP USD could quickly drop again.
If the Fed minutes show confidence in the US economy and the chances of tighter US monetary policy, the US Dollar outlook will improve and GBP USD will fall.
Friday’s upcoming US inflation data could prove highly influential too. If September’s US Consumer Price Index (CPI) impresses, Fed rate hike bets will rise further and the US Dollar will strengthen.
On the other hand though, underwhelming inflation data could cause fresh concerns that the US economy may not support another interest rate hike in the near future, which would lead to a ‘Greenback’ selloff.
GBP USD Interbank Rate
At the time of writing this article, the Pound Dollar exchange rate trended in the region of 1.3185. The US Dollar to Pound exchange rate traded at around 0.7582.